SINGAPORE (S&P Global Ratings) April 21, 2017--S&P Global Ratings said today that it had affirmed its 'BBB+' long-term corporate credit rating on PTT Public Co. Ltd. (PTT). The outlook is stable. We also affirmed our 'axA+' long-term ASEAN regional scale rating on the Thailand-based integrated oil and gas company.

At the same time, we affirmed our 'BBB+' long-term issue ratings on the company's US$1.45 billion in senior unsecured notes due between 2022 and 2042, of which US$1.37 billion is currently outstanding.

"We affirmed the ratings on PTT because we believe ongoing asset reorganization within the group will not undermine the group's earnings quality," said S&P Global Ratings credit analyst Bertrand Jabouley. "In addition, we believe PTT's solid consolidated cash balance and modest leverage can accommodate sizable spending, at a time when group companies are assessing capital expenditure options. We also expect the Thai government to maintain its commitment to support the company for the next two to three years at least."

PTT has a record of reorganizing assets between the parent company, its major subsidiaries, and external minority interests. PTT recently unveiled a plan to divest Thai baht (THB) 26 billion in legacy chemical assets to 49%-owned petrochemicals producer PTT Global Chemical Public Co. Ltd. (PTTGC). Moreover, after the listing of power subsidiary Global Power Synergy Public Co. Ltd. (GPSC) in 2015, PTT announced similar plans for its oil business (refined products distribution and marketing), PTT Oil and Retail Business Co. Ltd. (PTTOR).

We do not expect the dilution of PTT's ownership in GPSC or PTTOR to materially affect the group's earnings quality. That is because: (1) these businesses already operate in liberalized and competitive markets, and we do not view them as being of national interest to Thailand; and (2) they have not contributed materially to the consolidated group EBITDA (their aggregated contribution was about 7% in 2014-2016). PTT had earlier divested its stakes in refining companies Star Petroleum Refining Public Co. Ltd. and Bangchak Petroleum Public Co. Ltd. Such divestments have not affected the group's consolidated operations.

However, the corporate reorganization could have negative credit implications for PTT if the company divests, even partially, fully owned assets that we consider critical to its operations. These include the pipeline network and gas separation plants. That is because we assess PTT's vertical integration across the upstream, mid-stream, and downstream segments of the energy chain as a key contributor to its earnings resilience, as seen during the slump in hydrocarbon prices since 2014.

Likewise, a gradual depletion of PTT's fully owned asset base through divestment could lead us to reassess the Thai government's appetite to support the group as a coherent, integrated ecosystem. For the time being, we expect PTT to continue to benefit from its status as a government-related entity and see an extremely high likelihood that the government will provide sufficient and timely extraordinary support to the company in the event of financial distress.

A reduced proportion of assets at the PTT level would lead to a growing amount of priority debt at the subsidiary level, increased reliance on dividends from operating companies to service parent-level debt, and a higher degree of cash leakage. All these aspects could translate into rising structural subordination of creditors at the parent company level, depending on the quantum of remaining parent assets and parent-specific debt.

PTT currently has sizable financial headroom after three years of cautious investments amid low oil prices, and a steady operating performance. As of Dec. 31, 2016, the group has THB392 billion in consolidated cash and an adjusted ratio of debt to EBITDA of about 1.5x. To that extent, we believe the company and its key subsidiaries can absorb sizable investments with moderate financial impact on the group and need for additional funding.

"The stable outlook on PTT mirrors that on the sovereign credit rating on Thailand," said Mr. Jabouley.

We may downgrade PTT if any of the following occurs:

We lower the local currency sovereign credit rating on Thailand by two notches or we lower the foreign currency sovereign credit rating on Thailand by one notch;We assess the likelihood of extraordinary support from the government to have weakened substantially.

This could occur if the Ministry of Finance's shareholding in PTT falls below 50% or the government shifts its energy policy significantly and liberalizes the gas industry, thereby eroding PTT's market share, asset base, and relevance to the country; orPTT's stand-alone credit profile (SACP) weakens by more than four notches, which we consider highly unlikely.We could lower our assessment of PTT's SACP if: (1) the company's consolidated capital structure weakens, with a debt-to-EBITDA ratio exceeding 3.0x; or (2) we believe that a reducing scope of fully owned, upstream assets has permanently impaired the company's earning quality.

We could upgrade PTT if we raise the local and foreign currency sovereign credit ratings by at least a notch.

We could raise our assessment of PTT's SACP if: (1) the company establishes a record of a solid capital structure, with debt-to-EBITDA ratio below 2.0x; (2) generates sizable and recurring positive discretionary operating cash flows; and (3) has a clear and stabilized scope of assets.